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Understanding investments

Selecting the right investments for your workplace pension is one of the most important decisions you need to make. The investments you choose will influence how your pension grows in value and what ups and downs it may experience along the way.

There are some important things to think about when choosing how to invest your pension contributions.

How involved do you want to be?

How comfortable are you with managing your own investments? And, how confident are you that you’ll review them regularly?

If the answer is ‘not at all’, there are lots of options to choose from, depending on the retirement outcome you want. We have a range of options depending on what type of investor you are.

When it comes to your workplace pension, there are a lot of different funds to choose from. From those investing in individual markets and asset classes to global and multi-asset funds, there are options that can give you a spread of investments right for you.

Assets are what investment funds invest in. The four main asset classes are shares, commercial property, fixed interest securities (company or government bonds) and cash. A multi-asset fund is one that invests in multiple share classes. This is normally done by the fund investing in multiple other funds managed by other investment managers. These are sometimes also known as ‘multi manager funds’.

How much investment risk are you willing to take?

Any investment involves some sort of risk - both in terms of potential loss and uncertainty about how a fund may perform in the future. However, risk generally involves a trade-off. You can find out more on our risk and return page.

Important information

The more risk you’re willing to take, the greater your potential to see your investments grow – although this is never guaranteed and you may see your investment rise and fall sharply in value along the way.

If you choose funds that involve less investment risk, you may experience less volatility and get more predictable returns – but you may also experience lower long-term growth.

Different types of investments generally carry differing amount of risk and return potential. For instance, while equities (company shares) are the considered one of the riskiest asset classes, they have historically carried the greatest potential for growth over the long term.

While cash is generally considered the safest asset class, it may be the least likely to keep pace with inflation. Find out more about the different types of investment available.

Some steps to help you match funds to your risk level:

Each fund offered by your workplace pension has a fund fact sheet. This includes a risk rating which will help you assess each fund’s risk-return profile on a like-for-like basis. Log in to your plan to see the fund fact sheet(s) that apply to you.

Do you want passive funds or actively managed funds?

Some funds are ‘passive’, also known as tracker funds, and the fund manager simply aims to track a stock market index such as the FTSE 100 Index by investing in the same companies in the same proportions as that index. A passive fund aims to go up and down in value closely in line with the ups and downs of the market index it’s tracking.

Other funds are 'actively' managed. So, unlike passive funds, an active manager chooses which investments to hold, seeking to find opportunities for growth or income that others have overlooked. An active fund seeks to capture more of a market’s ups and avoid the downs, although there’s no guarantee it will achieve this.

Passive funds are often cheaper because stock selection is largely automated. Active funds justify higher costs by aiming to outperform the market, but this increases the chance that they may underperform. Both types of fund management still put your capital at risk and the value of the funds can fall as well as rise.

Spreading your investments

Spreading your investments can help to reduce the risk in your overall investment portfolio because generally, different types of investment behave differently at different times - some will go up, while at the same time others may go down.

You can diversify (spread your risk) by investing in different types of investment (cash, bonds, property and stocks and shares for instance), different countries, different industries and in funds managed by different fund managers. You can find out what each fund invests in by looking at the fund fact sheet.

If this all sounds a bit complicated, there are lots of funds which incorporate diversification in a single fund. Funds like these aim to make it easier for investors as they don’t have to research and manage several different funds. Some of these funds are even risk-profiled or risk-graded, which means they offer a number of different diversified options for different risk levels, from adventurous to conservative.

Important information

We all tend to focus on investment risk – but don’t forget inflation risk. This is the risk that your investments may grow less than the cost of living (inflation). For example, if the price of food, electricity, public transport etc is rising at an average of 3% a year and your investments are only growing at 2%, the ‘real’ value of your money is actually falling by 1% a year.

If you’re concerned about your pension pot losing its ‘real’ value – whether before or after retirement – you may want to consider investments that have most potential to at least keep pace with inflation, such as shares (equities), property and index-linked bonds.

It’s important to note that whilst diversification can help to manage the risk to your capital, it can’t remove risk. The value of your investments can still fall as well as rise and the final value of your pension pot may be less than has been paid in.